22 June 2021


Once upon a time, foreign income or gains ('FIG') used as collateral for a relevant debt would not have been taxed as a remittance if the remittance basis user ('RBU') borrowed the funds on commercial terms and made regular loan repayments.

However, on 4 August 2014, HMRC withdrew this 'concession' from their own guidance (RDRM33170) unexpectedly and RBUs were told that they had to repay such loans before 5 April 2016 in order to avoid triggering taxable remittances.

Transitional rules were put in place and HMRC later announced some 'grandfathering' provisions so that the 2014 changes did not apply retrospectively to remittances made before 4 August 2014. There were questions regarding HMRC’s interpretation of the law and the basis on which the guidance was withdrawn without consultation. For further information about the 2014 changes, please see our previous articles, 'Take 1' and 'Take 2'.

18 May 2021

HMRC updated RDRM35270 on 18 May 2021 (but note the latest RDRM update is RDRM10530 on 16 March 2021 according to the HMRC website). There was no consultation or announcement in respect of the amendments made in RDRM35270 and most advisers and taxpayers are not aware of this update.

How much is remitted?

The detailed technical changes to HMRC manuals are set out below. However, the main effect of these is a change in HMRC’s view of 'how much is remitted'.

If an RBU borrows 100, brings that 100 to the UK and offers FIG of 100 as collateral then the position remains unchanged – this is a remittance of 100 of FIG. However, life is rarely this straightforward. Usually collateral will exceed the amount of borrowing. Lenders are often keen to have multiple collateral for their loans.

What if an RBU borrows 100, brings that 100 to the UK but offers FIG of 250 as collateral? Previously HMRC would have said that that was a remittance of 100.

But the new interpretation seems to say that in this situation there is a remittance of 250.

This is seemingly without limit. If an RBU borrows 10 but offers collateral of 1,000,000 this seems, on the new interpretation, to be a remittance of 1,000,000!

However, if less than the full amount of borrowing is brought to the UK, then the position is clear. If an RBU borrows 100, but only brings (say) 99 of that to the UK, offering any amount of FIG as collateral, then the rules already clearly state that the remittance is 99 (or the amount of FIG if lower).

In more detail

The changes made to the manual are set out below:

  1. All references to s809Q(4) Income Tax Act 2007 ('ITA 2007') and the mixed fund ordering rules have been removed.
  2. HMRC have retracted their own (questionable) analysis that the offering of assets as collateral for a relevant debt is a 'transfer' for remittance purposes.
  3. If FIG had been used as collateral for a relevant debt, then the amount of remittance is no longer capped at the amount of the debt itself but it is capped at the amount of the FIG used as collateral.
  4. Cross-reference to RDRM35050 has been deleted.
  5. Confusingly, RDRM35050 has not been updated and it still includes a statement that the amount of remittance is capped at the amount of the debt.

Without further explanation from HMRC by way of consultation or announcement, it is difficult to understand why these changes were made and the reasoning behind the new approach. HMRC appear to have adopted a literal reading of s809P(4) ITA 2007 which provides: 'the amount remitted is equal to the amount of income or chargeable gains used'. In contrast, the pre-May 2021 interpretation was more logical and is succinctly put by HMRC in RDRM35050:

'The reason for this is obvious if you consider what would happen in the very unlikely event that the lender immediately ‘seized’ the collateral in the painting to repay the £100,000 debt in full. The lender would realise £160,000 from the painting; the lender would retain £100,000 to satisfy the debt owed and return £60,000 to Freda (ignoring accrued interest, penalties and service charges). So only £100,000 of the collateral is used in respect of the debt.'

Wider implications

Unfortunately for Freda and many RBUs, HMRC’s new interpretation could result in unexpected tax consequences if the amount of FIG used as collateral is far greater than the amount of the debt itself. It could be disastrous for the taxpayer but also for HMRC as illustrated below:

  1. Freda’s UK bank account went into overdraft (e.g. £1) after 4 August 2014 and the bank has security over her FIG account (e.g. £1 million). Following advice and the prevailing practice at the time, she filed her tax return accordingly and paid any tax due.
  2. Under the post-May 2021 interpretation, HMRC might argue that Freda made a remittance of the full £1 million of FIG.
  3. However, HMRC may now be out of time to issue a discovery assessment for this remittance.
  4. If, according to the new approach, Freda had remitted the £1 million of FIG when her account was overdrawn, then she might have created £1 million of clean capital inadvertently because the same funds cannot be remitted more than once!

Legitimate expectation

The recent case of Aozora[1] confirms that taxpayers cannot rely on HMRC guidance if 'it is only a representation as to HMRC's opinion as to the law'. Although HMRC manuals could be relied upon in certain (albeit limited) circumstances, it seems unfair to expect taxpayers and advisers to keep up with these unannounced changes. It is also unhelpful when two different paragraphs in the manual contradict each other because HMRC have not tracked through their own changes.

As of the date of this article, there are no transitional rules or 'grandfathering' provisions so it is uncertain as to when and how HMRC plan to implement the new interpretation. Furthermore, is it legitimate for HMRC to change their practices without warning in instances which could amount to retrospective taxation? One would hope not.

We understand that the Chartered Institute of Taxation, STEP and other professional bodies are urgently seeking a meeting with HMRC to clarify the position here.

How can we help?

Burges Salmon's tax specialists have substantial experience in tax, trusts, and estate planning. If you wish to discuss any of the matters raised in this article, please do get in touch with John Barnett or your usual contact within the team.

This article was written by John Barnett and Myra Leung.

[1] R (oao Aozora GMAC Investment Ltd) v HMRC [2019] EWCA Civ 1643

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